The Travelodge Saga. A brief study of the Restructuring

Some Background

Travelodge is a budget hotel operator (and UK’s largest independent hotel brand) with about 590 hotels, principally in UK and also in Ireland and Spain. The Travelodge Group owners are investment bank Goldman Sachs, Luxemburg based Anchor Holdings and its investors include US hedge funds Avenue Capital and Golden Tree Asset Management. From an operational perspective, the leaseholds constitute a significant chunk of assets and hence lease rentals payable to landlords (operational obligations) apart from interest and principal repayment to financial creditors (financial obligations) constitute a significant outflow. In July 2019, the group extended their financial obligations well into 2025. In fact, the Company was even planning a public stock flotation with a £1 billion valuation. Travelodge’s adjusted earnings last year were £129 m, on revenues of £693 m.

Covid-19 Strikes

While this was so, the Covid 19 pandemic struck with all but 48 properties open (for NHS and Healthcare workers) and cash inflows coming to a grinding halt, with holidays, meetings et all being cancelled. And according to the Company it was set to lose £ 350 million in revenues while lease rentals (annual outflow of £230 million) have to be anyways met which would definitely put the Company at risk of insolvency. It has to be noted that Travelodge earned 70% of its annual revenues in the April-Sep time frame.

The Company proceeded to withhold its quarterly rent payments at the end of March and in April and appointed Deloitte and investment Bank Moelis to negotiate rent reductions or deferrals with its landlords in an effort to reduce the annual rent bill by 80% in 2020 and 50% in 2021. The Company also borrowed a further £100 million to tide over the crisis and also wrote down the value of its business by £200 million. However, a majority of Travelodge’s landlords rejected the proposal and counter-proposed a £53-million reduction instead. Travelodge sought a minimum of £146 million in rental reduction and a stalemate ensued.

Other things remaining set, all that Travelodge wanted to do so as to ride out the pandemic by reducing rentals payable to the landlords to the tune of £146 million from 2020 into 2021 to survive through. It’s important to note that rentals payable on lease hold property constitutes a substantial chunk of leisure and hospitality companies like Travelodge, much like High Street retailing companies.

The Contention of the Landlords 

The grouse of the landlords was that they that they would require the rental income during this period which Travelodge was proposing to cut. Besides the reduction demanded was unreasonably high and that Travelodge was well off financially, can afford to pay and was not in financial distress. And in sum by resorting to rent reduction of this magnitude, Travelodge was effectively using Covid-19 as a pretext to substantially reduce its rental obligations far than necessary. Besides the same would impact the cash flow of landlords as well who would have also borrowed against the property. And as such the land lords were not in favour of the proposals.

And the Legal battle starts

Into April, with suspension of rental payments for March and April and as the talks with landlords went nowhere, the Company got a whiff of a potential/likely creditor action for having defaulted on its rental payments. With the planned amendment to the Insolvency Act to be promulgated by the Government to protect companies from insolvency actions arising out of defaults due to Covid-19, not yet forthcoming the Company launched proceedings to secure an injunction against an expected winding up proceeding which was granted- a first of a kind order where the High Court granted injunction based on anticipated/imminent legislation ( Travelodge Ltd v Prime Aesthetics Ltd [2020] EWHC 1217 (Ch))

See link below for a similar such order passed in the case of a High Street retailer.
http://www.bailii.org/ew/cases/EWHC/Ch/2020/1406.pdf

And to force its rent reduction plan, the Company announced a Company Voluntary Arrangement (CVA) with the following broad terms ( conceding some demands made by the landlords as well) so as to effect a cost restructuring just focussing on a reset on the rental cost outflow.

1. No hotel closures with all 584 hotels being run and 10,000 jobs being saved.
2. Reduction in rentals would last till end of 2021 with rentals being restored to 100% at the start of 2022.
3. £100m of Travelodge’s existing reserves, £100m in new borrowings and £40m in fresh equity to prop up the Company. Additionally, reduction in rates by the Govt to help Travelodge save an additional £35 million/annum.
4. If profits top £200m once business recovers, the surplus will be shared with the landlords.
5. Most of the land owners will get a minimum of 50% of the rental till 2021 end, save for 37 properties where no rent will be paid. The annual rental bill for Travelodge for 2020 and 20201 will average about 65% or £230 Million or a net £144 million worth of rent cuts in total.
6. Clause to make it easier for Landowners to exercise break clause in their contracts with Travelodge also introduced. And some of the quarterly rentals moved to a monthly payment mode.

The CVA to be successful had to approved by 75% by value of the class of creditors (land lords in this case). The same was voted upon on 19th June 2020 and the CVA was approved with the requisite majority.

And needless to add the UK Government too had in the meanwhile passed the protections for businesses from insolvency action which as on date stands extended till 30th Sep 2020. And it has be noted that Travelodge underwent a CVA in 2015 as well.

With this CVA firmly under its belt Travelodge now looks to reopen its hotels on 4th July the date now afforded by the Government.

Foot Note & Disclaimer

This article has been prepared by Ravi tracking it from a case law perspective & he had relied only on the information available in the public domain such as the financial media reporting, the public disclosures of the advisors and counsels such as Kirkland and Ellis, the Advisors and Deloitte LLP being the CVA Supervisors. The same does not constitute advice or opinion and is merely a consolidation of his understanding of financial restructuring effected during these time and nothing more.